1. The purpose of this document is to present our technical long term views on different
asset classes.Before reviewing some monthly and weekly charts, we would like first
to point out two important observations.
First, most of the markets we follow are caught in mid term (several months) complex
trading ranges so that tactical asset allocations will be of paramount importance in
2013.And second the correlation between equity indices is falling down meaning
that geographic bets will be of greater importance in 2013
Summary of 2012 and the context for 2013
After the flash crash in the summer of 2011, the market has entered a particularly
volatile period of transition and that led to the validation of major bullish reversal
patterns : a new uptrend was born.
A deep correction occurs in Q2 2012 but long term supports have held up well and the
accumulation zone correctly played its role sothat the recovery was very strong.
Recently another (shallow) correction unfold but recent bullish reactions confirmed
our view that indices are unlikely to make major selloffs in the coming weeks.
For the beginning of 2013, we could see an upward acceleration toward the 2000 and
2007 peaks for the S&P 500 and toward 290-300 for the Stoxx 600.
Around those technical levels, the upward cycle could be ending because most of the
technical targets would have been achieved and the index may enter into a more
random, erratic period. The timing for the next uptrend wave should be occurring
between now and Q1 2013.
1)Our views on equities
The S&P500
For now, there are no signs (reversal patterns) anticipating a possible trend reversal.
Accordingly, the more likley scenario for the coming weeks/months is that of an
upcoming test of the historic highs at 2000 and 2007, above 1500.
Those levels are undoubtfully powerful resistances which, even in a bullish context,
will be able to polarize prices for a few months.
However, remaining divergences with long term indicators, volumes that have not
confirmed the recovery since July and divergences between the Dow Industrials and
the Dow transports (which remained below their 2011 highs) mean there is a high risk
for a correction when prices will test their historic highs.
What to watch : the highs of 2007 and 2000.Also, this cyclical bull market will be 4
years old (the average age) in March 2013.
2. Long term the index is approaching the upper part of its trading range
More and more technical indicators are now diverging from prices.
The Stoxx 600&DJ Euro Stoxx 50
The main difference with the S&P is that the next resistances layer of the Stoxx 600 is
less robust and critical. On the DJ Euro Stoxx 50 above the 2600 resistance level,
European equities could rally a lot more before hitting the 3000 long term resistance.
These observations match well with our idea of a continuing outperformance of
European markets.Moreover European leadership is historically associated with
strong returns for global equities. Since 1990, the MSCI All Country Index returned
3. an annualized 19.6% when Europe was the best-performing region, against average
gains of 3.7% over the period .
What to watch : European indices have held above major support levels, like 2400 on
the EuroStoxx 50
But like the S&P 500, due to negative divergences still in place with long term
technical indicators, there is a high risk for a correction after the index reaches our
long term technical targets near major resistance zones.
Sector leadership : has remained stable during the last weeks of 2012 with Financials
and Industrials continuing to outperform and Telcos, Utilities and Oils, leading to the
downside. This is consistent with a bullish underlying market.
For 2013, you can see on the “ relative rotation graphs” that previous leaders like
Health Care and Food&beverages are losing momentum.Even if their trends are still
strong, we advice caution for these 2 sectors.On the contrary, Basic Resources is very
oversold with momentum improving.This lagging sector could be bouncing strongly
in the beginning of 2013.
Above 2600 there is room for the upside toward 3000
4. Sector rotations in Europe during the past 3 months show financials leaderships
and Utilities, Oil&Gas and Telecom lagging way behind.These trends are not
overextented.
The Nikkey
The index broke above the 9,200 resistance zone, confirming the anticipated upside
breakout. Further rise favoured towards the 10,000 area.
We continue to see a significant improvement of most weekly and monthly trend
indicators which confirms the start of a trend improvement.
What to watch : as long as the index remains above 9200, any pullback would be
seen as a buying opportunity.
5. Breaking out above 9200 but the index remains volatile
The MSCI Emerging Markets
The two-year underperformance of EM equities may be over.You can see that the
relative chart vs the MSCI World ex-emerging is close to the lower part of its long
term uptrend.We have a clear preference for Asia.
After 3 year of underperformance vs the MSCI World ex-emerging the
relative chart is now on right on the ascending trendline support.
6. 2)Our views on bonds
The German 10 year yields
Even if the long term trend is still down, the chart shows that the recent decline of
yields looks extremely speculative.
In the past every time the monthly RSI has fallen below oversold levels, bond yields
started a significant recovery lasting between 1&2 years.
Similar excess were seen in 1994,1999, 2005 and 2010.(see arrows on chart)
Right now a buy signal on the RSI was given end May 2012.
What to watch : to validate the start of a significant bullish reversal, (but not a
significant change of the major downtrend) yields must surpass 1.73 which was the
high made in September 2012.In terms of asset allocation a switch out of bonds into
equities could be triggered by a break of recent bond yields ranges.
Still a long term downtrend but an oversold bounce should occur in 2013
Spanish&Italian 10 year yields
Italian and Spanish 10 year yields have recently broken important support
zones.Italian yields resume their bear trend targeting 4% while Spanish yields have
broken their uptrend targeting 4.82%.From an FX perspective this means stay bullish
€ vs $.
7. 3)Our views on the €,$ and commodities
The €
The rate was close to reach our long term target of 1.2.with large traders betting
strongly against it.(very big short position)
8. The Euro had a breakout above an important down trendline, this was a bullish sign.
We think this was the first leg up with more to come in 2013.
Weekly and daily Macd are bullish.
What to watch :to begin another bullish wave the rate must first surpass resistance
zone above 1.305.
Arrows on the chart show that the last 2 “counter trend rally” for the € had the same
amplitude and duration.
It is important to keep in mind that even if the € reaches 1.4, the long term trend is
still down.
The € could reach 1.4 in 2013
The $ and commodities
We think the 2 assets are close to make reversal patterns.You can see this on the chart
of the US dollar index where there could be a potential big bearish head and shoulders
pattern.On the other hand on the chart of the CCI index (commodities), one could
observe a big bullish inverse head and shoulders pattern.For now these 2 patterns are
not yet activated but if this scenario happens it will be consistent with our forecasts of
a rise of the € and a fall of bond prices.
9. The US dollar vs Commodities: watching closely a possible trend reversal in 2013
Gold
Long term, gold continues to rise versus every currency we track .
Gold is correcting but we think it is a buying opportunity as large traders are now
accumulating long position.
Gold is consolidating its long term uptrend. Traders are beginning to accumulate long
position.(bottom pannel)
10. 4)Topics-Convictions
-Buy Europe equities vs US equities
The ratio SP500/Stoxx 600 shows that a new cycle of stronger European markets is in
place since June of this year.
-Buy Asia
11. We prefer Asia (bottom pannel) versus Latin America and Eastern Europe (top
pannel)
India
The Sensex recently made a 12 month high breakout.
China H shares
12. After months of trading range, the Hang Seng China Entreprise broke above 10.000
points. Same breakout pattern for the MSCI China
The Shanghai Composite (for local investors) is very oversold but this index remains
in downtrend and all technical bounce attempts have been short lived so far.
-Buy European luxury goods
The absolute and relative trends versus the Stoxx 600 show continuing
outperformance.
-Avoid high dividend stocks in Europe
Using the Stoxx Europe Select 30 index as proxy, you can observe that the relative
chart versus the Stoxx 600 is caught in a long term downtrend since 2007.
14. Price diverging from long term technical indicators and the investment grade spread
close to support zone may indicate a mature trend (but not a reversal yet).
-Buy Asian currencies
Most of them are caught in strong uptrends versus the Euro. The Asian Dollar Index
recently broke successful above the 118 level. Generally speaking appreciating
currencies have been a tailwind for Asian equity markets.
4)Summary of our views for 2013
Bullish on equity until indices reach their respective targets which are close to major
resistances.(end Q1- Q2)Preferences for European and Asian equities.
Bullish €, (until 1.40), gold, Italian&Spain10 year yields.
Bearish $.
Neutral on the German 10 year yields with a bullish bias above 1.73% (bearish bias
below 139 on the future)
